A recent Appellate Division, First Department ruling on repurchase suits relating to residential mortgage-backed securitizations is not just affecting the New York Commercial Division, it’s also impacting federal court – with mixed results.
What makes the sequence of events notable is the differing extent to which some federal judges are relying on the state appellate court’s Dec. 19, 2013 decision that New York’s six-year statute of limitations for breach claims begins on the closing date of the mortgage loan purchase agreement, not when a repurchase demand is made and rejected.
In federal cases with diversity jurisdiction, intermediary appellate rulings can serve as persuasive authority to the federal courts, but they are not binding until the state’s highest court rules on the matter. But federal judges will turn to the appellate divisions for direction.
“In the absence of controlling authority from the New York Court of Appeals, judges in the Southern District of New York generally will look to the Appellate Divisions for guidance concerning New York law,” said Edward Spiro, partner at Morvillo Abramowitz Grand Iason & Anello.
In a decision issued last Friday, Southern District Judge Shira Scheindlin tossed out a put-back RMBS suit filed by U.S. Bank National Association, which was serving as trustee for Lehman XS Trust, Series 2006-4N. The suit alleged breach of representations and warranties by GreenPoint Mortgage Funding involving a $1.3 billion mortgage loan portfolio.
Ruling that the complaint was time-barred since the July 2013 action was filed more than six years after the parties’ March 2006 purchase agreement, Scheindlin first cited a July 24, 2013 decision from Southern District colleague Robert Sweet, who held in Deutsche Alt-A Securities Mortgage Loan Trust, Series 2006-OA1 v. Deutsche Bank Structured Products that under New York law, “claims which are subject to pre-suit cure or demand requirements accrue when the underlying breach occurs, not when the demand is subsequently made or refused.”
But Scheindlin also pointed out that the statute of limitations issue “has been repeatedly addressed and resolved, most recently in a case from New York’s intermediate appellate court interpreting a substantially similar contractual provision in a case with substantially similar facts.”`
That case, of course, is Ace Securities v. DB Structured Products, the First Department ruling which reversed New York Supreme Court Justice Shirley Kornreich’s May 13, 2013 decision that a bank’s failure to repurchase defective loans upon receiving the trustee’s notice of demand triggers the statute of limitations.
But Kornreich, despite being reversed and seeing the reversal’s apparent effect of extinguishing other put-back claims in the Commercial Division, may be encouraged that at least one federal judge agrees with her.
In a Jan. 7 order, Southern District Judge Alvin Hellerstein denied a Dec. 30 request by defendant WMC Mortgage urging the judge to reconsider his Dec. 17 ruling denying dismissal of a similar repurchase action despite the Ace II ruling issued just two days later.
As first reported by Reuters’ Alison Frankel last week, in a one-page, handwritten order in the case Federal Housing Finance Agency v. WMC Mortgage, in which Deutsche Bank National Trust Company later intervened as plaintiff trustee, Hellerstein wrote: “I’ve read the Appellate Division’s Decision in Ace II and it does not change my views that the contract was breached not at the time of closing but at the time of failure to cure.”
Thus another apparent conflict – this time in the Southern District – relating to the timeliness of RMBS claims has arisen. It’s similar to a situation seen in the Commercial Division last year, when Justice O. Peter Sherwood reached an opposing conclusion to his colleague, Kornreich, on the statute of limitations, eventually sending the issue to the First Department.
“There are instances, however, where Southern District judges will say that the Appellate Division got it wrong and will offer their prediction as to how the N.Y. Court will decide a particular issue,” Spiro, who is not involved in these line of cases, said.
That might be Hellerstein’s intuition, while Scheindlin, in a footnote to her opinion in Lehman v. Greenpoint Mortgage Funding, wrote, “in the absence of contrary law from the New York Court of Appeals or ‘persuasive data’ that it would rule differently, I follow the First Department’s decision in ACE Securities.”
“We are pleased with [Scheidlin’s] decision,” said James Murphy of Murphy & McGonigle, which represents defendant Greenpoint Mortgage Funding, in an interview with CLI. “Under New York law, it simply cannot be the case that the statute of limitations on repurchase claims is open-ended for the 30 or 40 years’ life of the securities, plus six years.”
“Judge Scheidlin’s thorough and well-reasoned decision should be a milestone on the way toward putting to rest the many hedge fund-driven cases that have been filed beyond the six-year limitations period,” he continued.
It’s probable that Quinn Emanuel Urquhart & Sullivan, which represents the plaintiff trustee, will file an appeal to the Second Circuit.
The question now is whether the Court of Appeals may indeed issue the decision to end all disputes on this timeliness issue in put-back claims. All signs point to the fact that there will be a notice of appeal filed to the Court of Appeals in Ace II. The deadline for which to do so is Jan. 21.
In the event the Court of Appeals takes up a potential appeal in Ace II and upholds the First Department, it is not clear how that may affect the case before Hellerstein, now proceeding to the discovery phase.
The question there is, would a Court of Appeals ruling reversing the First Department be retroactive? If and when that time comes, letters from attorneys may boomerang across the federal docket where RMBS cases on this issue are pending, pointing out the differing Hellerstein and Scheindlin conclusions.
The court “is not bound by the First Department’s holding as to this issue in ACE II,” and “there is no reason the Court should reverse its denial of WMC’s motion to dismiss based on the flawed reasoning in ACE II,” Ropes & Gray partner Harvey Wolkoff, plaintiff’s counsel, informed Hellerstein in a letter filed with the court on Dec. 30.
Editor’s Note: This story has been corrected to reflect that James Murphy of Murphy & McGonigle is defense counsel for Greenpoint Mortgage Funding.